Nobody with bad credit ever actually intended to be in this position. For most of them, they were simply unable to afford their bills or they got themselves in financial difficulty somewhere along the line. Unfortunately, bad credit can follow you around for quite some time and make it difficult for you when it comes to getting a loan. The good news is that there are places to go for unsecured personal loans for people with bad credit.
What lenders consider bad credit
If you've had CCJs, missed several payments on a credit card, mortgage or others, been bankrupt or in an IVA in previous years, lenders will consider you a bad credit borrower.
Further more, people with no credit history (i.e. have never borrowed before) may also be classified as bad credit borrowers.
If you are self-employed however, you're not necessarily a poor credit borrower; lack of proof of income is the reason you'd have difficulty getting a mainstream loan.
Bad credit unsecured loans are largely provided by specialist lenders; mainstream lenders are often unwilling to take the risk associated with this type of loan.
About bad credit unsecured loans
An unsecured loan is a loan where the lender does not rely on your personal possessions (collateral) as security, in case you fail to pay back the loan. Since there's no security, lenders hugely rely on trust. One of the ways financial services measure trust is the use of borrower's credit rating; your previous borrowing activities (credit history), is what's used to determine your credit worthiness.
Bad activities such as missed payments, CCJ's, defaults and others are what determine a bad credit rating.
When applying for an unsecured loan, bad credit history can further complicate the situation; Lenders normally rely on collateral to ensure they can recover their money, a lack of collateral combined with bad credit history compounds the risk that a lender must take. For that reason, unsecured loans with bad credit normally incur very high interest rates.
Also, unsecured personal loans are given in small amounts; typically up to £25000 from most UK lenders. You also agree to a repayment term (e.g. 5 years), although some loans can be flexible, allowing you to pay more when you can or take a payment break.
Other Loan alternatives
1. Payday loans
A payday loan as the name suggests, is a loan you take out with the intention of paying it back when you receive your next salary payment. A payday loan is available to either tenant or homeowner, a bad credit rating might not affect whether you get a loan or not.
Payday loans are given in very small amounts, typically £1000 or less with most UK lenders.
Consider a payday loan if:
- You need a fast loan in small amounts; if approved you can receive the money on the same day you take out the loan.
- Can payback the loan within a short period (usually required the same month).
- Have a very bad credit history; some payday loans do not look at your credit rating.
This might not make sense if you're a tenant; however, have you considered that some lender accept other assets besides the home as collateral? If you own a car or other assets, it's worth finding out whether the lender will accept to secure the loan on those assets; this will lower the interest rate on the loan.
If you're a homeowner, it makes sense to take out a secured loan as opposed to a bad credit unsecured loan:
Being a homeowner makes a difference to how much interest you pay on the loan; some lenders might give you a loan at a normal rate despite having poor credit history.
Also, some people may argue that by taking out an unsecured loan, there's no risk to your home. To a degree that's true, however, if you default on the loan and are referred to collectors, the home (or the equity therein) might be one of the assets up for repossession.